MARKET
RAP Local charts handy in troubled waters
By R M Cutler
MONTREAL - At least three different patterns were in evidence this week across
the Asian equity markets. In Australia and Japan, Monday opened strongly down,
followed by a lethargic Tuesday, a Wednesday and Thursday that showed some
recovery, and another big drop on Friday following Wall Street's poor
performance on New York's Thursday.
By contrast, in Hong Kong and Singapore, the main indexes were relatively
stable all week before opening strongly down on Friday, with the Hang Seng
Index later closing down 3.6% and the Straits Times Index ending down 1.8%. And
in India, the BSE Sensex 30 was down steadily all week, closing on Thursday
just below 16,500 (down over 7% from the Monday open of about 17,800)
before opening on Friday down over 3%
further and extending the decline to 4.7% around midday. In fact, on Monday,
the BSE index recorded the second-biggest decline in absolute numbers.
This column does not usually treat the New York markets in detail, but the
current week is so exceptional as to require comment. In the mid-afternoon of
Wednesday 5 in New York, when Wall Street was again tightrope-walking along its
low support point (12,000 for the Dow Jones Industrials and 1,310 for the
Standard & Poor's 500) and heading down, CNBC network broadcast a report
promising that terms for bailing out the bond insurer Ambac would soon be
agreed.
This was the same network that had on February 22, the last time the indexes
were so low, reported that a bail-out would be sealed most likely before the
end of that month. We know now that it wasn't. But the markets soared on the
announcement, taking the indexes out of dangerous territory.
By coincidence, when the major Wall Street indexes threatened to descend back
under those very support levels on the morning of March 5, CNBC broadcast
another report promising a settlement of the issues facing troubled bond
insurer Ambac Financial in the very immediate future. The markets rebounded
again, but this time the immediate gains did not even last through the day, as
the momentum dissipated. And in the event, the deal finally announced was
disappointing, because no bail-out, properly speaking, is involved.
Rather, Ambac will stop insuring mortgage-backed debt and issue about US$1.5
billion in new shares to raise fresh capital: all this to maintain its
subsidiary's AAA rating. As this announcement was being digested, yet another
CNBC report (citing no sources) asserted that a core group of investors (other
reports had named a number of large financial institutions as potential
participants) had already been found who were building a book with other
investors, and that private equity might also get into act.
That report was aired late in the morning of March 6. But investors did not
find it as encouraging as CNBC's previous reports on Ambac and shrugged off the
news. At the time the New York market was down about 0.5%. It ended the day
down nearly 2%, following further reports of a retail housing market spiraling
with no end in sight.
This explanation has been necessary to make sense of the week in Asia, where
the only commonality among the three patterns mentioned at the outset was a
Friday open down over 1.5% and falling. The only exceptions were Jakarta and
Kuala Lumpur; even soaring Shanghai was caught in the downdraft.
The Indian pattern is the easiest to account for. It is coming down slightly to
earth following its irrationally exuberant performance during the last quarter
of 2007 and the beginning of the current quarter. Also there is continuing fear
that major Indian banks have significant exposure in the subprime mortgage
crisis that they have not acknowledged.
The Hang Seng and Straits Times indexes predominate in finance and real estate,
with a significant number of Chinese energy stocks also in the Hong Kong index.
Why, then, should they have been relatively stable this week, when finance and
real estate have been the Achilles' heel at least of the New York exchanges?
The Chinese energy stocks listed on the Hong Kong exchange would have buoyed
the Hang Seng Index, but Singapore's behavior can be explained only by the
engineering and technology listings in the Straits Times Index (a sector also
important in Hong Kong).
Also, I mentioned that major equity indexes in Australia and Japan have had
similar patterns this week. Interestingly, over the past six months (except for
the first three weeks of January), the Nikkei 225 index has tracked the
Shanghai SSE Composite more closely in percentage moves than it has tracked any
of the major New York indexes, despite similar patterns. The Australia All
Ordinaries, by contrast, has followed Wall Street more closely than Shanghai.
Possibly this is due to the fact that, although the Chinese market is ever more
important for both countries, Australia's exports tend more to be raw materials
whereas Japan's are finished goods; and the former have tended to lead New York
in recent months. (Canada's resource-heavy TSE index also followed the
Australian rather than the Japanese pattern.)
All this suggests is that the decoupling of markets is a process rather than an
either/or condition, that this process may well have begun, and that it will be
driven partly by differentiated sectoral dominance in the various national
markets.
R M Cutler (http://www.robertcutler.org)
is a Canadian international affairs analyst.
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